Convertible market flat to higher as stocks dip

By Ronda Fears

Nashville, Tenn., Oct.23 - Convertible traders said the market was flat to slightly higher Tuesday as stocks slipped a bit. New issues continued to climb, including the new Cubist Pharmaceuticals Inc. deal that intrigued many players as it priced with the lowest conversion premium seen in quite some time. Meanwhile, price talk emerged on the upcoming Motorola Inc. deal, which is structured as a mandatory convertible pricing alongside a straight bond. Also, convertible players were watching a Tyco International Ltd. preparing a straight debt deal, speculating that some of the proceeds might be earmarked for the company's upcoming put date for its convertible due 2020.

Hedge funds were the dominant players in the Cubist deal, market sources said. It was small and "well oversubscribed" although a more definitive sign of demand could not be ascertained. Cubist sold $125 million of 5.5% convertible subordinated notes due 2008 with a 10% initial conversion premium. In the immediate aftermarket, the new Cubist convertible gained 3.25 points from par to 103.25 bid, 104 offered as the underlying common shares were hit hard by the event. The stock dropped $3.82 to $39.18.

"It was priced to convert," said a convertible trader at a hedge fund in New Jersey. "There were a lot of people wanting in on this one."

Elsewhere in primary market activity, price talk emerged as expected on Motorola's $875 million of mandatory convertibles, putting the yield between 7.0% and 7.5% and the initial conversion premium at 18% to 22%. The wireless phone maker also is selling $400 million of 10-year senior notes in the Rule 144A market. Goldman Sachs, J.P. Morgan and Salomon Smith Barney are joint lead managers of the registered convertible deal, which is set to price after the market close Thursday.

Motorola aims to use the potential $1.4 billion in proceeds from the deals to pay down short-term debt and general corporate purposes.

It was not clear what Tyco International Ltd. had earmarked for proceeds from a $1.5 billion note sale. Market sources said they heard the new Tyco deal priced in a spread of 125 to 175 basis points over the comparable treasuries. Analysts had been speculating that Tyco would raise capital to pay in cash the estimated $3.5 billion put on its zero-coupon convertible notes due 2020, which could be exercised on Nov. 17.

Tyco did not make a release about the note offering, and phone calls were not returned.

The Tyco convertibles were quoted flat on the day, with the 2020 issue at 75.25 and the zero-coupon convertibles due 2021 at 73.625. Tyco common shares closed off 2c to $49.02.

Clear Channel Communications was also in the debt markets and sold $750 million of 6% five-year notes. Traders said the Clear Channel convertibles were flat as the stock gained 89c to $43.27.

Although stocks were mostly lower, traders said convertibles were flat to higher. The Dow industrials closed off 36.95, or 0.39%, to 9340.08 and the Nasdaq slipped 3.64, or 0.21%, to 1704.44.

New paper continued to fuel interest, traders said, although some new issues declined Tuesday. Symantec Corp.'s new 3% convertibles due 2006 dropped 1.9375 points on the day to 106.0625 bid, 107.0625 offered as the common gained $2.21 to $56.44. Teradyne Inc.'s new 3.75% convertible senior notes due 2006 lost 0.8125 point on the day to 102.9375 bid, 103.1875 offered as the common slid 7c to $19.82.

Omnicom Group Inc. convertibles soared, however, alongside the common stock as the giant ad agency reported higher profits and revenues in third quarter despite the downturn in the economy. The Omnicom 2.25% convertibles due 2013 (Baa1/A) gained 8 points on the day to 156.375 and the zero-coupon converts due 2031 (A3/A) were up 0.5 point to 101. Omnicom stock climbed $4.17 to $78.10 as the company reported Tuesday that third quarter net income rose 8% to $92.4 million and total revenue also gained 8% to $1.57 billion.

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